The talent market is changing rapidly, and now may be the time to equip your company with the right compensation strategies to capitalize on a plentiful labor market. As employee incentive programs evolve during and after the COVID-19 pandemic, their importance is heightened now more than ever to meet employees’ physical and financial goals while building value and continued profits for company owners.
Many closely held businesses typically utilize two main types of executive compensation plans – cash or equity-based. Traditional qualified plans indicate that the plan meets ERISA guidelines and qualifies for certain tax benefits, with 401(k)s being the most commonly used plan. These plans are somewhat standard, but because there is a portion that the employees contribute themselves, employees may focus more on the base salary, rather than the benefits of the plan(s). Some companies use generous 401(k)s as a retention tool, which can be very effective, but psychologically, 401(k) plans may not add some of the near-term notable value potential employees are seeking that other compensation plans provide. Because most companies have a standard 401(k), it is difficult to stand out in this regard and attract new employees. Adding in a profit-sharing option in addition to a 401(k) may add some staying power as potential candidates may mentally see this as a different option to earn, but they still will not see the payouts until much later.
When developing or revising your company’s compensation plan, a primary goal should be to attract and retain high performing individuals that align to the ownership, growth and financial goals of your company. In order to achieve that goal, it is important to understand who the key people within the company are and if your expectations and goals align with theirs. It is not enough to simply have a compensation plan for employees. Businesses should additionally have a compensation strategy to not only achieve their goals and attract talented employees, but also to enhance the tax benefits and avoid legal troubles as well. Within that strategy, businesses should include the following:
- Substantial financial award
- Financial or performance benchmark
- Benefits of cliffs/ graded vesting
- Deferred benefit payout
- Communication in writing
- Legal considerations
Traditionally, cash compensation is the primary focus when it comes to compensation. But because of the COVID-19 pandemic, many companies are rethinking their model to incorporate other strategies that are more beneficial for their cash flow and general overhead.
For high demand candidates, many find the opportunity for equity as a compensation plan to be most appealing, even though business owners may be hesitant to share true ownership. However, financial advantages of providing equity to employees are wide reaching. Phantom equity, stock appreciation rights, employee stock ownership plans (ESOPs) or simply long-term incentive plans tied to performance may provide the same buy-in and upside value for potential candidates. These types of compensation plans can help offset ongoing overhead and allow companies to be fiscally nimble.
With the complexity and ever-changing rules and regulations in our country, it is a best practice to review compensation plans on a continual basis. During a recent DHG webinar, we found that 31 percent of attendees had not reviewed their compensation plans within the last year. To make sure your company is making the most of your compensation strategy, be sure to discuss your plans with a CPA and/ or legal professional, or reach out to us at firstname.lastname@example.org.